So since the late 1970s, the rich have been getting richer, and the middle and lower classes have stayed in exactly the same place in absolute terms (that’s the graph on the left). The graph on the right looks more horrifying, but is saying exactly the same thing, because:

if you have a pie, and

the pie is growing, but

your slice stays the same, then

you are obviously taking a smaller proportion of the now-larger pie.

At this point, people normally go back into history and look for repeat patterns. And they discover that, actually, this is not the first time that America has seen such “gross” distortions of income equality/inequality. The last time was just before the Great Depression, when the likes of John D. Rockefeller, the Mellon siblings and Henry Ford practically owned America.

And people panic because they get concerned that a new Great Depression is coming. And you get this:

So let’s step back a second and ask the important question:

“How?”

As in: how did the inequality gap happen again?

The unspoken but heavy implication from the “socially conscious” seems to be that, somehow, the rich manipulated everyone into it. Through, I don’t know, exorbitant prices maybe? Or theft. Something illicit and insidious, with a dash of mafia panache.

But there are more reasonable reasons for the growing gap.

At the same time, we should also be wondering how it is that the bottom 80% to 90% of Americans have continued to improve their standard of living in the face of an annual average income that has not changed for 40 years.

It should come as no surprise that these two economic curiosities have linked causes.

Three things:

The size of the US Labour Force

Globalization

The rapid expansion of consumer credit

Here goes…

Step 1: The Emancipation of Women

Some growth rates:

Between 1970 and 1990, the population of the United States grew at an average rate of 1.01% per year.

Over that same time frame, the US Labour Force grew at an average rate of 2.12% per year.

That is, the labour force grew at double the rate of the population.

Sure, perhaps some of that could be explained by the Baby Boomers of the 60s reaching working age. But that’s not really enough to explain the magnitude of the discrepancy in a country that has the “Developed” description attached to its economic status.

So here’s another graph:

The black line represents the total labour participation rate (number of workers as a percentage of total possible workers).

The blue line represents the labour participation rate of men.

The pink line: the labour participation rate of women.

Since the 1950s, the number of working women in America has been charging upward at pace. In layman’s terms, that meant that America’s middle class was socially progressing from having one breadwinner to two.

Unfortunately, that does mean that wages will tend to stagnate – a larger labour force leaves employers with no incentive to pay higher salaries when they don’t have to.

Step 2: Globalization

In the 1990s, business overcame the communication hurdle to operating internationally. Suddenly, there were computers and low-cost communication networks, fax machines and the rise of email. The outsourcing of jobs became a practical possibility within reach of even the most medium-sized of businesses.

The American middle class workers found themselves competing with the cheap labour from abroad. As the labour supply expanded to include the cheap labour of China, India and the rest of South Asia, so there was even less incentive for American firms to increase wages for American workers.

Step 3: Consumer Credit

This graph:

When the money from the two salaries stopped being enough in the early 1990s, and globalization depressed the wage situation even further, consumer credit exploded – and middle class America sustained herself on borrowed money.

Who benefited from this?

While the American labour force faced stiff competition both from within (the emancipation of women) and without (globalization), their spending continued to keep pace with the growth of consumer credit.

Meanwhile, the rich/upper class, being those that own the corporations and companies of America, was delighted to find themselves facing the following:

Static and/or Falling Wage Costs; and

Increased Revenues thanks to increased consumer spending

At the same time, they had to do something with all the money that they were making! So either they expanded their operations, or they invested their money in a new brand of fixed income instruments being frantically created by investment bankers: securities backed by debts owed by the middle class.

Boom. Making money off the middle class’ spending AND the middle class’ borrowing to fund that spending.

Does that sound sustainable?

Indeed not.

But you can’t blame the rich for taking advantage of the social and international changes that were taking place…